1. Field of the Invention
The present invention relates to administering and facilitating financial transactions. More specifically, the present invention relates to automated handling of financial transactions known as Repurchase Agreements, which are also commonly known as “repo” agreements.
2. Description of Related Art
A repurchase agreement or “repo” agreement (or, simply, a“repo”) is a contract giving the seller of an asset the right or obligation to buy back the asset at a specified price on a given date. Generally speaking, a repo agreement is a form of short term borrowing for dealers in various types of assets, e.g., government securities, loan obligations, etc. The dealer sells the assets to investors, usually on an overnight basis, and buys them back the following day. For the party (e.g., a dealer). selling the assets, and agreeing to repurchase it in the future, it is a “repo”; for the party (e.g., an investor) on the other end of the transaction, buying the asset and agreeing to sell in the future, it is a “reverse repurchase agreement.” However, the transaction is often just simply termed a “repo” by both parties. A repo is similar to a secured loan, with the lender of money receiving assets as collateral to protect against default. The legal title to the assets passes from the dealer or seller, i.e., the provider of the collateral, to the investor, i.e., the party providing the money.
For the buyer or investor (the “buyer/investor”), a repo is an opportunity to invest cash for an agreed-upon period of time, typically overnight, whereas other investments typically involve whole numbers of months. Moreover, a repo is a short-term and secure investment; in return for investing, the buyer/investor receives a rate of interest as well as collateral to secure the investment.
For the dealer or seller (the “broker/dealer/seller”), repos are used to cost effectively finance long positions in securities or other assets in the dealer's or seller's portfolio.
In practice, a repo agreement can be transacted in several ways. In a first way, the buyer/investor and the broker/dealer/seller negotiate with one another and close an agreed-to deal without any outside assistance. The broker/dealer/seller then would deliver securities to the buyer/investor and the buyer/investor would deliver cash to the broker/dealer/seller. This is typically referred to as a “DVP repo,” or “delivery versus payment repo.”
A second, more common way to effect a repo transaction is to involve a trusted third party, or intermediary, to match the details of the trade agreed between the broker/dealer/seller and the buyer/investor, and to assume all of the post trade processing and settlement work related to the trade; this is typically referred to as a “tri-party repo.” The third party is typically a bank. As illustrated in FIG. 1, in a tri-party repo, the third party acts as a “tri-party repo service provider” 110 to the two principal parties in the underlying trade, i.e., the broker/dealer/seller 120 and the buyer/investor 130. Typical types of underlying trades include not only repurchase agreements, but also securities lending agreements, loan agreements, derivatives agreements and others.
FIG. 2 shows a generic transaction flow for a tri-party repurchase agreement where a service provider (typically a custodian bank) is interposed to ensure that each party to the transaction is never without cash (in the case of the broker/dealer/seller) or assets (in the case of the buyer/investor) throughout the term of the transaction, thereby ensuring that both parties are “whole” at all times. The presence of the third party service provider not only brings an additional layer of security to the transaction, but it also brings efficiencies and reduced costs for both principal parties to the trade.
In the tri-party repurchase agreement transaction flow shown in FIG. 2 and beginning at 210, a broker/dealer/seller and a buyer/investor first agree, between themselves, on a particular trade at 210. Thereafter, the third party service provider receives trade instructions from both the broker/dealer/seller and the buyer/investor at 220. An account administrator at the tri-party repo service provider then matches the instructions from the buyer/investor to the instructions received from the broker/dealer/seller at 230. Once a match has been confirmed by the account administrator, the broker/dealer/seller delivers the assets (such as assets 140, illustrated in FIG. 1) to the tri-party repo service provider and, at essentially the same time, the buyer/investor delivers the agreed-upon cash or loan amount (such as loan amount 150, illustrated in FIG. 1) to the tri-party repo service provider at 240. The tri-party repo service provider thereafter confirms to the buyer/investor that the assets are eligible under the terms of the tri-party agreement, and applies applicable margin to the assets per the tri-party agreement at 250. The assets are segregated in a custody account established by the tri-party repo service provider in the name of the buyer/investor at 260. The tri-party repo service provider also transfers the cash/loan amount to the broker/dealer/seller at 270 and the transaction flow process ends at 280.